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Cisco (CSCO) Q2 Earnings Beat, Revenues Miss; View Dim

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Cisco Systems Inc.CSCO reported second-quarter fiscal 2017 earnings (including stock-based compensation) of 53 cents per share, beating the Zacks Consensus Estimate by three cents.

Excluding stock-based compensation, earnings remained flat on a year-over-year basis at 57 cents, which was in line with the top end of management's guided range.

Revenues declined 2.9% year over year to $11.58 billion and missed the Zacks Consensus Estimate of $11.59 billion. Revenues include SP Video CPE Business for both the periods. Excluding SP Video CPE Business, revenues decreased 2% from the year-ago quarter, in line with the low end of management's guided range.

Cisco Systems, Inc. Price, Consensus and EPS Surprise

Cisco Systems, Inc. Price, Consensus and EPS Surprise | Cisco Systems, Inc. Quote

Segment Revenue Details

On a year-over-year basis, products (73.3% of total revenue) were down 5.5% to $8.49 billion, while services (26.7%) increased 4.9% to $3.09 billion.

Under the Product category, Collaboration, Wireless, Security and Other increased 4%, 3%, 14%, and 53%, respectively, on a year-over-year basis. However, this increase was partially offset by weak performance from Switching, NGN Routing, Data Center and Service Provider Video segments which decreased 5%, 10%, 4% and 41%, respectively.

Geographically, on a year-over-year basis, revenues from the Americas, EMEA and APJC declined 4%, 1% and 4%, respectively. Total emerging markets declined 7% while the BRICs plus Mexico went down by 5%.

In terms of customer segments enterprise inched up 1%, commercial grew 3%, public sector declined 6% and service provider dipped 1%.

Operating Details

Non-GAAP gross margin expanded 30 basis points (bps) from the year-ago quarter to 63.6% in the reported quarter. The expansion was primarily driven by higher service gross margin (up 210 bps).

Operating expenses as percentage of revenues increased 40 bps to 35.6% primarily owing to increase in most of the expense line items. As percentage of revenues, Research and development (R&D) and General and Administrative (G&A) expenses increased 30 bps and 240 bps, respectively. However, Sales and Marketing (S&M) expense remained flat on a year-over-year basis.

As a result, operating margin (including stock-based compensation) contracted 20 bps to 28%.

Cisco Systems Inc. - Earnings Surprise | FindTheBest

Balance Sheet and Cash Flow

Cisco exited the second quarter with cash and investments balance of almost $71.8 billion compared with $71 billion in the prior quarter. Cash & cash equivalents and investments available in the U.S. at the end of quarter were $9.6 billion.

Total debt (short term and long term) was $34.9 billion, slightly up from $34.8 billion at the end of previous quarter.

Cisco raised quarterly dividend by 3 cents to 29 cents per share, to be paid on Apr 26, 2017. The company repurchased approximately 33 million shares of common stock under its stock repurchase program at an average price of $30.33 per share for an aggregate purchase price of $1.0 billion.

As of Jan 28, 2017, Cisco had repurchased 4.7 billion shares for an aggregate purchase price of approximately $98.6 billion since the inception of the stock repurchase program. The remaining authorized amount under this program is approximately $13.4 billion.

Guidance

For third-quarter fiscal 2017, revenues are expected to decline in the range of 2% or remain flat on a year-over-year basis. Non-GAAP earnings are anticipated to be in the range 57-59 cents per share. The Zacks Consensus Estimate was pegged at 53 cents on revenue estimates of $11.87 billion.

Gross margin is expected to be in the range of 63-64%, while operating margin is anticipated between 29% and 30% for the quarter.

Our Take

We believe that Cisco's expanding footprint in the rapidly growing security and data center market are promising. The company's security solutions continue to add customers, which is positive in our view.

Although the transition from blade to rack server continues to hurt Data Center revenues, the collaboration with Microsoft's MSFT Azure is expected to drive growth going ahead. Further, the acquisition of AppDynamics is also positive in our view.

Additionally, the company's partnerships with the likes of salesforce.com CRM and International Business Machines IBM will help it to gain significant traction in the cloud and Internet of Things (IoT) market space in the long run.

Moreover, continued share buyback and dividend hikes are positive in our view.

We note that Cisco has outperformed the Zacks Computer Networks industry in the last one year. While the stock gained 24.0%, the industry witnessed an increase of 23.2%. We expect the aforesaid factors to drive upside going forward.

However, the modest second-quarter results reflected intensifying competition from several smaller players in the networking segments, slowing order growth from service providers and challenges in the emerging markets. We believe that third-quarter revenue guidance continues to reflect these growing headwinds.

Zacks Rank & Key Picks

Cisco currently carries a Zacks Rank #4 (Buy).

You can see the complete list of today's Zacks #1 (Strong Buy) Rank stocks here .

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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